The SEC's In-Kind ETP Approval: A Catalyst for Crypto Market Efficiency and Institutional Adoption

The U.S. Securities and Exchange Commission's (SEC) July 2025 approval of in-kind creations and redemptions for crypto asset exchange-traded products (ETPs) marks a pivotal regulatory shift, aligning the treatment of digital assets with traditional commodity benchmarks while addressing long-standing inefficiencies in the market. This decision, hailed as a "fit-for-purpose regulatory framework" by SEC Chairman Paul S. Atkins, is expected to reduce transaction costs, enhance liquidity, and foster deeper institutional participation in crypto markets according to the SEC press release. By enabling authorized participants (APs) to exchange underlying crypto assets like bitcoin and ether directly for ETP shares, the SEC has bridged a critical gap between crypto and traditional commodity ETPs, unlocking new opportunities for investors.

Enhancing Liquidity and Reducing Costs

Prior to the July 2025 approval, crypto ETPs operated under a cash-only model, which imposed higher transaction costs and exposed investors to price slippage during conversions between crypto assets and U.S. dollars. The new in-kind mechanism eliminates these inefficiencies by allowing APs to create or redeem ETP shares directly using the underlying crypto assets, bypassing the need for costly cash transactions. According to a Federal Reserve report, this change is projected to reduce net asset value (NAV) premiums-historically a persistent issue in crypto ETPs-from an average of 0.6% to levels closer to those of traditional commodity ETPs. Additionally, bid-ask spreads for crypto ETPs, previously averaging 4.6 basis points, are expected to narrow further as arbitrage opportunities expand.

The cost savings extend beyond transactional efficiencies. Commissioner Mark Uyeda emphasized that in-kind redemptions will enable ETPs to manage exposure "more cheaply and transparently," reducing operational burdens for issuers and investors alike. For instance, Bitwise's Bitcoin and Ethereum ETPs, which have adopted the in-kind structure, are already reporting tighter bid-ask spreads and improved tax efficiencies, making these products more attractive to a broader range of investors.

Benchmark Alignment with Traditional Commodity ETPs

The SEC's decision also brings crypto ETPs in line with the regulatory and operational standards of traditional commodity ETPs, such as those tracking gold or oil. Prior to 2025, crypto ETPs faced segmentation challenges due to the difficulty of arbitraging between crypto and equity markets, a problem exacerbated by cash-only redemptions and regulatory hurdles. By permitting in-kind transactions, the SEC has created a more level playing field, enabling crypto ETPs to track their NAVs more closely and reducing the friction that previously hindered market integration.

This alignment is further supported by the SEC's introduction of generic listing standards for commodity-based ETPs, which removed prior barriers to market entry, spurring innovation. As a result, major asset managers like BlackRock and Fidelity have entered the crypto ETP space, leveraging their infrastructure and brand trust to offer products with cost structures comparable to traditional ETPs. The convergence of crypto and traditional ETP benchmarks is also evident in the surge of institutional adoption, with over $87 billion in net inflows for crypto ETPs globally in 2025.

Institutional Adoption and Market Maturation

The regulatory clarity provided by the SEC's in-kind approval has accelerated institutional adoption of crypto ETPs. Data from SSGA indicates that 86% of institutional investors now have exposure to digital assets or plan to allocate to them in 2025, with 68% of these investors already invested in or planning to invest in BTC ETPs. This trend is further amplified by the approval of spot Bitcoin ETFs in early 2024, which catalyzed a 400% increase in institutional flows, with BlackRock's IBIT alone attracting over $50 billion in assets under management.

Institutional demand is driven by the need for alternative stores of value, improved risk-adjusted returns, and a hedge against fiat currency debasement. The in-kind mechanism enhances these benefits by streamlining arbitrage and hedging strategies, making crypto ETPs a more viable tool for portfolio diversification. As noted by PowerDrill.ai, the maturation of regulatory frameworks-such as the EU's MiCA regulation and the U.S. GENIUS Act for stablecoins-has created a scalable environment for institutional participation, with 2026 poised to mark a significant step in the mainstream integration of digital assets.

Conclusion

The SEC's in-kind ETP approval represents a watershed moment for crypto markets, addressing inefficiencies that previously hindered liquidity, cost competitiveness, and institutional adoption. By aligning crypto ETPs with traditional commodity benchmarks, the SEC has not only enhanced market efficiency but also laid the groundwork for a more robust and inclusive financial ecosystem. As regulatory frameworks continue to evolve and institutional demand grows, crypto ETPs are set to play an increasingly central role in global investment portfolios, bridging the gap between digital innovation and traditional finance.